Friday, April 19, 2013

We the People vs. the Loot Seekers

By Mark D. Hughes

We, the loot-seekers of the United States, in order to form more perfectly protected monopolies, impose injustices, insure domestic servitude, provide for our common defense against competition, promote our own welfare by securing the coercive powers of the state for ourselves and our posterity, do ordain and establish this Constitution for the United Special Interest Groups of America.”
Those were not the words penned by the Founding Fathers, but who could tell from today’s America? Over the last two centuries, we have seen our civil and economic liberties thwarted, despite the clear intent of the Founders. They sought to prevent the concentration of power in the hands of a privileged few. But regulatory legislation has enabled loot-seeking special interests to use the coercive powers of the state against the rest of us.
Ludwig von Mises called this a “caste system”:
Our age is full of serious conflicts of economic group interests. But these conflicts are not inherent in the operation of an unhampered capitalist economy. They are the necessary outcome of government policies interfering with the operation of the market. They are not conflicts of Marxian classes. They are brought about by the fact that mankind has gone back to group privileges and thereby to a new caste system. . . .
In a free-market society. . . there are neither privileged nor underprivileged. There are no castes and therefore no caste conflicts. There prevails the full harmony of the rightly understood interests of all individuals and of all groups. . . .
One example of caste privilege began in 1937 when a few large New York dairies successfully lobbied the legislature for protective licensing. Under the law, still in effect, new licenses could be issued only if they do not cause “destructive competition.”
There is, of course, no such thing as destructive competition for the consumer. Competition means lower prices, higher quality, and better service. To be sure, competition may be a nuisance for inefficient, established dairies. But it is not an annoyance to the milk-consuming public.
While the 1937 licensing law does not openly forbid the entry of new dairies into New York, that was its intent and effect. Until this January, the market was controlled by five large dairies. As a result, New York City consumers have traditionally paid a considerably higher price for milk than any other metropolitan area with a similar supply. In November 1986 the average price of a gallon of milk in New York City (except Staten Island) was $2.42. Philadelphia consumers paid $1.93.
Then in December 1985, after trying for seven years to gain access to the New York market, Farmland Dairies of Wallington, New Jersey, was reluctantly granted a license to serve Staten Island. The average price immediately dropped 40 cents per gallon and consistently remained about 30 cents cheaper than milk sold in the rest of New York City.
The New Jersey dairy spent the next year unsuccessfully trying to gain access to the rest of the city. On December 11, 1986, Agricultural Commissioner Gerace rejected Farmland’s request because “it would tend to destructive competition . . . and would not be in the public interest.”
The Commissioner’s decision immediately became the topic of angry editorials throughout the state. Even statist politicians like New York’s Mayor Ed Koch, recognizing the mood of the city’s consumers, jumped on the band wagon.
New York Governor Cuomo claimed that he would like to see increased competition among milk dealers, but said he would not intervene in the Commissioners “quasi-judicial” decision.
The Governor had received $58,700 in campaign contributions from the dairy cartel. But the dairies’ licensed overcharges have earned them more than $50 million a year, so it is not hard to understand the incentive for such donations, nor Governor Cuomo’s decision not to intervene.
Although it is a relatively small example of state intervention, the New York dairy licensing law reflects the isolationist mentality indicative of all loot-seeking interests. It is no different from those seeking tariffs on foreign automobiles, restrictions on foreign investment, or business licensing for entrepreneurs.
The economic isolationists claim that restricting entry into a market will “save jobs.” They argue that added competition from an external source will force local producers out of business and thereby cause irreparable damage to the economy of the region (whether a city, state, or nation). But clearly they know nothing of a market economy. As Henry Hazlitt wrote in his great Economics in One Lesson:
This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.
The secondary consequence of economic isolationism is simple—it reduces the actual and potential wealth of the community involved. By preventing competition in the New York dairy industry, the milk licensing law allows the dairy cartel to charge a higher price for milk than would exist in a free market. This is money the consuming public would spend on other goods and services in the community. It is true that added competition might force some of the inefficient dairies out of the market and some dairy workers would then be unemployed. However, contrary to what the economic isolationists claim, the story does not stop there, since more than $50 million a year of added consumer spending translates into new jobs in other businesses.
Even if the new jobs created just replace the old ones lost (probably not the case), the wealth of the community is still increased. After the price of milk is reduced, the consumer can do one of two things: 1) purchase the same amount of milk as usual for less money and spend what’s left on other goods and services, or 2) spend the same amount of money on milk and take more milk home. Regardless of the choice, the amount of goods and services consumed by the public will increase even though the amount spent by each consumer did not change.
Someone understood at least part of this, however. On January 8, 1987, Federal Judge Leonard D. Wexler held that the decision to prohibit Farmland Dairies from distributing milk in all of New York City was unconstitutional. “It is clear,” he said, “from Gerace’s report that this decision to deny Farmland’s license application was based on economic protectionism.”
Farmland started delivering milk to seven supermarkets in the city on January 9. Each immediately lowered the price it charged the consumer by 20 cents a gallon. By January 17, prices had dropped between 30 and 71 cents per gallon.
Unfortunately, Judge Wexler did not declare the law itself unconstitutional, although he did say that this “would not be without foundation.” The judge suggested this be left “to the discretion of the State Legislature.”
So, despite the court’s ruling, the New York City dairy market is still not free. New York has seen the price of milk drop, but we will never know how much more it will drop until the milk licensing law is repealed and all who want to compete are allowed to try.
The economic and civil liberty we still have in America exists not because legislators are concerned for the welfare of “We the people.” Our liberty, and the chance we have to expand it, exists only because a heroic few refuse to stand aside while special interests impose a new two-caste system—the state privileged vs. the rest of us.